Estonia is one of the highest rated liberal market-based economies in the world. We are one of the first economies having a flat rate income system, a friendly environment for foreign investment and no tax policy on reinvested corporate profits.
Our tax system can be summarized with two words – simple and progressive. The main focus is on indirect taxes. When opening a company in Estonia the most attractive factor is that the tax rate on reinvested profits and retained profits is 0. The only time you are subject to income tax in Estonia is when you are distributing profits.
Estonia has an investment-friendly taxation system and transparent and functioning legislation.
The Estonian tax system consists of national taxes and local taxes collected by local governments in their jurisdiction. Local taxes can be applied by the local government, although only a few have introduced them. The taxes the local government can apply are:
As the name applies, the direct taxes have to be paid by your company directly. This applies to income tax, land tax and heavy goods vehicle tax.
Indirect tax, on the other hand, are paid by customers. The tax is usually added to the price of the end product or service (for example excise tax added to fuel price). Such taxes include value-added tax, excise duties and customs duty.
Income tax is further divided into two – personal income tax and corporate income tax.
Estonian resident companies and permanent establishments of the foreign entities (including branches) are subject to income tax only in respect of all distributed profits (both actual and deemed), including:
Fringe benefits are taxable at the level of the employer. The employer pays income tax and social tax on fringe benefits. Besides paying corporate income tax, you are required as an employer to withhold and pay employees’ income tax to the Tax and Customs Board.
The corporate income tax rate in Estonia in the year 2017 is 20/80. The taxation period is a calendar month and the income tax declaration must be submitted to the Tax and Customs Board by the 10th of the subsequent month.
Value-added tax (VAT) is paid on goods and services sold in the course of doing business. The tax also applies for the import of goods from non-EU countries and acquisition of goods from European Union countries. Value-added tax is paid by the end consumer.
You have to become a VAT payer once your company’s annual turnover exceeds 16 000€*, at which point registering with the Tax and Customs Board as a VAT payer is compulsory. If your company’s turnover is below the limit then registration is not obligatory.
* The Estonian government has just approved the bill draft that will raise the VAT registration threshold from 1 January 2018, from 16 000 euros to 40 000 euros. To read more about this change please click here.
Social tax is to be paid by an employer for an employee and the money is used to fund pension insurance and state health care.